ULIPs demystified

The ‘ULIPs are costly’ belief is primarily a result of the high premium allocation and fund management charges that ULIPs charged in 2008. Everything you need to know about the product.

Arun recently got married and wanted to gift an insurance plan to his wife. His friend Varun suggested buying a Unit Linked Insurance Plan (ULIP), as it is a great way to get insurance as well as investment in a single product. However, Arun was reluctant. He believed that ULIPs were costly and risky.

Just like Arun, many investors refrain from ULIPs.This fear stems from various misconceptions around the objectives, functioning and the pricing structure of ULIPs. Let us address and demystify some of these:

# Myth 1: ULIPs are costly compared to other investment products

The ‘ULIPs are costly’ belief is primarily a result of the high premium allocation and fund management charges that ULIPs charged in 2008. Post that era, ULIPs have undergone several changes, primarily WRT the charges and fund management fees. Costs, on average, have come down and the plans available today are competitively priced.

Since ULIPs are market-linked products, policyholders are expected to stay invested for a longer term as the charges are front-loaded and benefits accrue over the lifecycle of the investment.

# Myth 2: ULIPs invest only to equity market, hence risky

ULIPs allow you to choose the level of risk you wish to take, by allowing you to choose between funds with different objectives.You can choose an aggressive or a conservative fund depending on your preference. You can also switch between funds based on your lifestyle and changing risk appetite.

For e.g.: A young person with fewer financial liabilities mightbe willing to take more risks and might opt for an aggressive fund, while an individual nearing retirement might prefer a conservative approach.

# Myth 3: ULIPs give extra ordinary returns

People generally compare ULIPs with pure investment products, hence the misconception. Just as you cannot compare apples with oranges, this comparison is also not valid. You should not forget that ULIPs also provide an insurance cover along with the investment component, something that pure investment products do not offer. Hence, a part of the premium is used to provide life cover and towards management fees. The remaining amount is invested.

# Myth 4: Cannot surrender policy before maturity

People are hesitant to buy a ULIP as they fear that they cannot surrender the policy before maturity. This is a general misconception as ULIPs come with an option to surrender the policy after the lock-in period, which is generally 3-5 years from the date of policy. You will get the fund value after deduction of surrender charges.

Some ULIPs also have the option of continuing the policy and enjoying the life cover even after withdrawing majority of invested amount. Premium payments can also be discontinued after the lock-in period as mentioned in the policy document.

# Myth 5: Life cover decreases with market volatility

Some investors believe that since ULIPs are linked to equities, the sum assured would reduce if the market dips. However, this is not true. Even in case of a bear market when your fund values have hit the bottom,the life cover remains the same. In case of the death of the life assured, ULIPs pay the complete life cover or the fund value, whichever is higher.